What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-10 compared with 2023-05-11 · 77 added, 46 removed, 115 unchanged (52% of the section changed)

26 unchanged sentences

Our global presence in the United States, China, United Kingdom, Hong Kong, Singapore and Japan allows us to provide local sales and engineering support services to our existing and future customers.

We manufacture our products in a state-of-the-art facility in Shenzhen, China, and in our advanced and proprietary facilities in Newark,

California and Irvine, Scotland.

We manufacture our products in a state-of-the-art facility in Shenzhen, China, and in our advanced and proprietary facilities in Newark, California and Irvine, Scotland.

We control 100% of the manufacturing and shipping process which enables us to respond quickly to customer product demand and design requirements.

5 unchanged sentences

In 1996, we re-incorporated into a Delaware corporation and, in 2012, we again changed our domicile from Delaware to Nevada by completing a merger with a newly formed Nevada corporation named Interlink Electronics, Inc.

Our principal executive office is located at 1 Jenner, Suite 200, Irvine, California 92618 and our telephone number is (805) 484-8855.

Our principal executive office is located at 15707 Rockfield Boulevard, Suite 105, Irvine, California 92618 and our telephone number is (805) 484-8855.

Our website address is www.interlinkelectronics.com.

14 unchanged sentences

The percentages in the table are based on net revenues.

Three months ended March 31

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands, except percentages)

8 unchanged sentences

Income (loss) before income taxes

Income tax expense

Income tax expense (benefit)

Net income (loss)

Comparison of Three Months Ended March 31, 2023 and 2022

Comparison of Three Months Ended June 30, 2023 and 2022

Revenue, net by the markets we serve is as follows:

Three months ended March 31,

Three Months Ended June 30,

(in thousands, except percentages)

4 unchanged sentences

Products with longer design cycles often have much longer product life-cycles.

Industrial and medical products generally have longer design and life-cycles than consumer products.

Products for the industrial, medical and automotive markets generally have longer design and life-cycles than consumer products.

We currently have products with life-cycles that have exceeded twenty years and are ongoing.

Revenues were up in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 in the medical and industrial markets and for our standard products, and were down in the consumer market.

The increase in revenue from our medical market customers is primarily due to a continued increase in orders from and shipments to our largest medical customer, whose purchasing volume has increased as demand for installations of their products in hospital settings has continued to increase following the COVID-19 pandemic, and also in part to sales to new medical market customers resulting from our acquisitions of SPEC/KWJ and Calman.

The increase in revenue from our industrial market customers is due to increased shipments to these customers for use in their ongoing product lines resulting from increased demand by their customers, and also in part to sales to new industrial market customers resulting from our acquisitions of SPEC/KWJ and Calman.

Revenues were up in the three months ended June 30, 2023 compared to the same quarter in 2022 in the industrial and medical markets, and for our standard products, and were down in the consumer and automotive markets.

The increase in revenue from our industrial market customers is due to increased shipments to these customers for use in their ongoing product lines resulting from increased demand by their customers, and also due to sales to new industrial market customers resulting from our acquisitions of SPEC/KWJ and Calman.

The increase in revenue from our medical market customers is primarily due to a continued increase in orders from and shipments to our largest medical customer, whose purchasing volume has increased as demand for installations of their products in hospital settings has continued to increase following the COVID-19 pandemic, and also due to sales to new medical market customers resulting from our acquisitions of SPEC/KWJ and Calman.

The increase in revenue for our standard products is primarily due to the addition of new customers resulting from our acquisitions of SPEC/KWJ and Calman.

In all markets, the timing of orders from our customers is not always predictable and can be concentrated in varying periods during the year to coincide with their demand and production plans.

Three months ended March 31,

Three Months Ended June 30,

(in thousands, except percentages)

Our gross profit and gross margin percentage are impacted by various factors including product mix, customer mix, sales volume, and fluctuations in our cost of revenues, which are comprised of material costs, direct and indirect production labor costs, warehousing and logistics costs, facilities costs, and other costs related to production activities.

Gross profit was up during the the three month ended March 31, 2023 compared to the three months ended March 31, 2022 due to increased revenues, while gross margin percentage was down in the current year compared to the prior year due primarily to changes in product and customer mix.

Three months ended March 31,

Gross profit and gross margin percentage during the three months ended June 30, 2023 were up compared to the three months ended June 30, 2022 due primarily to higher revenues (resulting in large part from our acquisitions of SPEC/KWJ and Calman), lower materials and components costs on certain orders, and favorable changes in product and customer mix.

Three Months Ended June 30,

(in thousands, except percentages)

Engineering, research and development

Engineering and R&D expenses consist primarily of compensation expenses for employees engaged in research, design and development activities, plus the cost of those employees’ indirect supplies and allocation of facilities expenses.

Our R&D team focuses both on internal design development in order to develop our products and solutions, as well as custom design development aimed at addressing our customers’ unique design challenges.

Engineering and R&D costs for the three months ended March 31, 2023 were up compared to the three months ended March 31, 2022 due to increased engineering headcount resulting from the December 2022 acquisition of SPEC/KWJ.

Three months ended March 31,

Engineering and R&D expenses consist primarily of compensation expenses for employees engaged in research, design and product development activities, and the cost of those employees’ indirect supplies and allocation of facilities expenses.

Our R&D team focuses both on internal design development in order to develop our standard sensor solutions, as well as custom design development aimed at addressing our customers’ unique design challenges.

Engineering and R&D costs for the three months ended June 30, 2023 were up compared to the three months ended June 30, 2022 in absolute amounts but approximately the same as a percentage of revenue;

the increase was due to increased engineering employee headcount following our acquisition of SPEC/KWJ in December 2022, approximately $82,000 of non-cash amortization expense on intangible assets acquired in the SPEC/KWJ acquisition in the current year period, and increased prototyping and product-development activities this year as compared to the prior year.

Three Months Ended June 30,

(in thousands, except percentages)

Selling, general and administrative

Selling, general and administrative expenses consist primarily of compensation expenses for sales and administrative employees, legal and other professional fees, facilities expenses and communication expenses.

Selling, general and administrative costs for the three months ended March 31, 2023 were up compared to the three months ended March 31, 2022 due to increased selling, general and administrative headcount resulting from the December 2022 acquisition of SPEC/KWJ and, to a lesser extent, the March 2023 acquisition of Calman, increased professional services costs associated with the acquisition of Calman, and the additional facilities and other operating costs of these incremental operations.

Three months ended March 31,

Selling, general and administrative expenses consist primarily of compensation expenses for employees in the sales, marketing, finance and executive functions, legal and other professional fees, communication expenses and facilities costs.

Selling, general and administrative expenses for the three months ended June 30, 2023 were up compared to the three months ended June 30, 2022 due to increased employee headcount following our acquisitions of SPEC/KWJ in December 2022 and Calman in March 2023, and increased legal and other professional fees.

Three Months Ended June 30,

(in thousands, except percentages)

Other income (expense), net

Other income (expense) consists of non-operating income and expenses, such as gains and losses on marketable securities, foreign currency transaction gains and losses, interest income and expense, and other non-operating income and expenses.

Other income (expense) for the three months ended March 31, 2023 was comprised of $67,000 of interest income, and $3,000 of foreign currency transaction losses, while other income (expense) for the three months ended March 31, 2022 was comprised of $156,000 of gains on marketable securities, $2,000 of foreign currency transaction losses, and $1,000 of other non-operating income items.

Three months ended March 31,

Other income (expense), net consists of non-operating income and expenses, such as gains and losses on marketable securities, foreign currency transaction gains and losses, interest income and expense, and other non-operating income and expenses.

Other income (expense), net for the three months ended June 30, 2023 was comprised of $27,000 of foreign currency transaction gains, $31,000 of interest income, and $6,000 of other non-operating income, while other income (expense), net for the three months ended June 30, 2022 was comprised of $225,000 of gains on marketable securities, and $117,000 of foreign currency transaction gains.

Three Months Ended June 30,

(in thousands, except percentages)

1 unchanged sentence

Income tax expense reflects statutory tax rates in the jurisdictions in which we operate, adjusted for permanent book/tax differences.

Our effective tax rate is directly affected by the relative proportions of our pre-tax earnings and losses in the jurisdictions in which we operate.

The effective tax rate for the three months ended March 31, 2023 was impacted by having incurred tax expense on our foreign pre-tax income while not realizing a benefit on our domestic pre-tax loss due to the valuation allowance on our domestic NOLs.

Based on the expected mix of domestic and foreign earnings and losses, we anticipate our effective tax rate to remain similar to the U.S.

statutory rate of 21% primarily due to a significant portion of our earnings originating in the higher rate China jurisdiction (25%), offset by lower rate jurisdictions in the United Kingdom (19%), Singapore (17%) and Hong Kong (16.5%).

Our effective tax rate is directly affected by the relative proportions of earnings and losses in the jurisdictions in which we operate, including our current limitation on realizing tax benefits on domestic losses due to the valuation allowance on our domestic net operating loss carryforward.

Based on the expected mix of domestic and foreign earnings and losses, we anticipate our effective tax rate to generally remain higher than the U.S.

statutory rate of 21% primarily due to a significant portion of our consolidating earnings being recorded in the jurisdictions of China (25% tax rate) and the United Kingdom (25% tax rate), and to a lesser extent in Singapore (17% tax rate), and Hong Kong (21% tax rate), while our domestic losses do not benefit our effective tax rate due to the valuation allowance.

State income taxes also have an impact in the U.S.

6 unchanged sentences

could have significant effects, positive and negative, on our effective tax rate, and on our deferred tax assets and liabilities.

Comparison of Six Months Ended June 30, 2023 and 2022

Revenue, net by the markets we serve is as follows:

Six Months Ended June 30,

(in thousands, except percentages)

Revenues were up in the six months ended June 30, 2023 compared to the first half of 2022 in the industrial, and medical markets, and for our standard products, and were down in the consumer and automotive markets.

The increase in revenue from our industrial market customers is due to increased shipments to these customers for use in their ongoing product lines resulting from increased demand by their customers, and also due to sales to new industrial market customers resulting from our acquisitions of SPEC/KWJ and Calman.

The increase in revenue from our medical market customers is primarily due to a continued increase in orders from and shipments to our largest medical customer, whose purchasing volume has increased as demand for installations of their products in hospital settings has continued to increase following the COVID-19 pandemic, and also due to sales to new medical market customers resulting from our acquisitions of SPEC/KWJ and Calman.

The increase in revenue for our standard products is primarily due to the addition of new customers resulting from our acquisitions of SPEC/KWJ and Calman.

In all markets, the timing of orders from our customers is not always predictable and can be concentrated in varying periods during the year to coincide with their demand and production plans.

Six Months Ended June 30,

(in thousands, except percentages)

Gross profit during the six months ended June 30, 2023 was up compared to the six months ended June 30, 2022 due to higher revenues (resulting in large part from our acquisitions of SPEC/KWJ and Calman), while gross margin percentage was down due to higher materials and components costs on certain orders and unfavorable changes in product and customer mix.

Six Months Ended June 30,

(in thousands, except percentages)

Engineering, research and development

Engineering and R&D costs for the six months ended June 30, 2023 were up compared to the six months ended June 30, 2022 due to increased engineering employee headcount following our acquisition of SPEC/KWJ in December 2022, approximately $82,000 of non-cash amortization expense on intangible assets acquired in the SPEC/KWJ acquisition in the current year period, and increased prototyping and product-development activities this year as compared to the prior year.

Six Months Ended June 30,

(in thousands, except percentages)

Selling, general and administrative

Selling, general and administrative expenses for the six months ended June 30, 2023 were up compared to the six months ended June 30, 2022 due to increased employee headcount following our acquisitions of SPEC/KWJ in December 2022 and Calman in March 2023, and increased legal and other professional fees.

Six Months Ended June 30,

(in thousands, except percentages)

Other income (expense), net

Other income (expense), net for the six months ended June 30, 2023 was comprised of $24,000 of foreign currency transaction gains, and $98,000 of interest income, and $6,000 of other non-operating income, while other income (expense), net for the six months ended June 30, 2022 was comprised of $381,000 of gains on marketable securities, $115,000 of foreign currency transaction gains, and $1,000 of other non-operating income.

Six Months Ended June 30,

(in thousands, except percentages)

Income tax expense

Income tax expense reflects statutory tax rates in the jurisdictions in which we operate, adjusted for permanent book/tax differences.

Liquidity and Capital Resources

Cash requirements for working capital and capital expenditures have been funded from cash balances on hand, cash generated from operations, and sales of equity securities.

As of March 31, 2023, we had cash and cash equivalents of $6.7 million, working capital of $8.2 million and no indebtedness.

As of June 30, 2023, we had cash and cash equivalents of $5.1 million, working capital of $8.3 million and no indebtedness.

Cash and cash equivalents consist of cash and money market funds.

Of the $6.7 million of cash balances on hand, $2.7 million was held by foreign subsidiaries.

Of our $5.1 million of cash, $1.3 million was held by foreign subsidiaries.

If these funds are needed for our operations in the U.S., we have several methods to repatriate without significant tax effects, including repayment of intercompany loans or distributions of previously taxed income.

1 unchanged sentence

or foreign taxes to repatriate these funds.

We have outstanding 200,000 shares of our 8.0% Series A Convertible Preferred Stock (the “Preferred Stock”) that have an aggregate liquidation preference of $5.0 million, for which we pay, when, as and if declared by our board of directors, monthly cumulative cash dividends at an annual rate of 8.0%;

We have outstanding 200,000 shares of our 8.0% Series A Convertible Preferred Stock (the “Preferred Stock”) that have an aggregate liquidation preference of $5.0 million.

We pay, when, as and if declared by our board of directors, monthly cumulative cash dividends on the Preferred Stock at an annual rate of 8.0%;

this is equivalent to $0.16667 per month and $2.00 per annum per share, based on a per share liquidation preference of $25.00.

Dividends on the Preferred Stock are payable monthly in arrears on the 15th day of each calendar

Dividends on the Preferred Stock are payable monthly in arrears on the 15th day of each calendar month.

Our board of directors has declared cash dividends on the Preferred Stock each month since the Preferred Stock was issued in October 2021, and we expect that the board will continue to declare, and we will continue to pay, cash dividends on the Preferred Stock each month while the Preferred Stock is outstanding, subject to applicable limitations under Nevada law.

7 unchanged sentences

Our cash flows from operating, investing and financing activities are summarized as follows:

Three Months Ended

Six Months Ended

(in thousands)

Net cash (used in) operating activities

Net cash provided by (used in) operating activities

Net cash (used in) investing activities

Net cash (used in) financing activities

Net Cash (Used In) Operating Activities

For the three months ended March 31, 2023, the $620,000 of cash used in operating activities was attributable to net loss of $191,000, adjusted for non-cash charges of $48,000 and cash used in changes in operating assets and liabilities of $477,000.

For the three months ended March 31, 2022, the $367,000 of cash used in operating activities was attributable to net income of $142,000, adjusted for non-cash charges of $64,000, unrealized gains on marketable securities of $156,000, and cash used in changes in operating assets and liabilities of $417,000.

Accounts receivable increased from $1.2 million at December 31, 2022 to $2.3 million at March 31, 2023 due to higher shipments during the first quarter of 2023 compared to the fourth quarter of 2022, and the addition of accounts receivable from our March 2023 acquisition of Calman.

Many of our customers pay promptly and accounts receivable is generally related to the most recent shipments.

Inventories increased from $2.1 million at December 31, 2022 to $3.0 million at March 31, 2023.

Net Cash Provided By (Used In) Operating Activities

For the six months ended June 30, 2023, the $245,000 of cash used in operating activities was attributable to net income of $190,000, adjusted for non-cash charges of $194,000 and offset by cash used in changes in operating assets and liabilities of $629,000.

Accounts receivable increased from $1.2 million at December 31, 2022 to $2.1 million at June 30, 2023 due to higher shipments during the second quarter of 2023 compared to the second quarter of 2022, and the addition of accounts receivable from our March 2023 acquisition of Calman.

Many of our customers pay promptly and accounts receivable are generally related to the most recent shipments.

Inventories increased from $2.1 million at December 31, 2022 to $2.9 million at June 30, 2023.

Inventory balances fluctuate depending on the timing of materials purchases and product shipments, and also increased due to our March 2023 acquisition of Calman.

Prepaid expenses and other current assets increased from $321,000 at December 31, 2022 to $505,000 at March 31, 2023 due primarily to the increase in the amount to be collected from the SPEC/KWJ acquisition escrow resulting from the reduction in the purchase price upon finalization of their closing-date working capital.

Accounts payable and accrued liabilities increased from $841,000 at December 31, 2022 to $3.5 million at March 31, 2023, primarily due to purchase consideration that remains payable to the prior owners of Calman, and also due to the timing of payment for purchases of materials, compensation accruals, and other outside services, and the addition of Calman’s accounts payable and accrued liabilities to our consolidated balances.

Prepaid expenses and other current assets decreased from $321,000 at December 31, 2022 to $252,000 at June 30, 2023 due primarily to the receipt of the amount collected from the SPEC/KWJ acquisition escrow resulting from the reduction in the purchase price upon finalization of their closing-date working capital.

Accounts payable and accrued liabilities increased from $841,000 at December 31, 2022 to $1,566,000 at June 30, 2023, primarily due to purchase consideration that remains payable to the prior owners of Calman, and also due to the timing of payment for purchases of materials, compensation accruals, and other outside services, and to the addition of Calman’s accounts payable and accrued liabilities to our consolidated balances.

For the six months ended June 30, 2022, the $28,000 of cash provided by operating activities was attributable to net income of $254,000, adjusted for non-cash charges of $126,000 and unrealized gains on marketable securities of $381,000 and cash provided by changes in operating assets and liabilities of $29,000.

Net Cash Used In Investing Activities

Net cash used in investing activities of $2.8 million for the three months ended March 31, 2023 consisted of $2.7 million used to acquire the equity interests of Calman (which is net of $1.6 million of cash acquired), and a minor amount of purchases of property, plant, and equipment.

Net cash used in investing activities of $2.2 million for the three months ended March 31, 2022 consisted of purchases of $2.2 million of marketable securities and a minor amount of purchases of property, plant, and equipment.

Net Cash (Used In) Financing Activities

Net cash used in financing activities of $100,000 for the each of the three months ended March 31, 2023 and 2022 consisted of payment of dividends on our Preferred Stock.

Net cash used in investing activities of $4.3 million for the six months ended June 30, 2023 consisted of $4.3 million used to acquire the equity interests of Calman (which is net of $1.6 million of cash acquired), and a minor amount of purchases of property, plant, and equipment.

Net cash used in investing activities of $6.0 million for the six months ended June 30, 2022 consisted of purchases of $6.0 million of marketable securities and $9,000 of property, plant, and equipment.

Net Used In Financing Activities

Net cash used in financing activities of $377,000 for the six months ended June 30, 2023 consisted of $177,000 used for repurchases of 19,403 shares of common stock and $200,000 used for payments of dividends on our Preferred Stock.

Net cash used in financing activities of $200,000 for the six months ended June 30, 2022 was for payments of dividends on our Preferred Stock.

Off-Balance Sheet Arrangements

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis